The U.S. Federal Communications Commission has voted to overhaul a decades-old system of telephone subsidies in rural areas, with the funding refocused on broadband deployment.

The FCC's vote Thursday would transition the Universal Service Fund's (USF's) high-cost program, now subsidizing voice service, to a new Connect America Fund focused on broadband deployment to areas that don't yet have service. The FCC will cap the broadband fund at US$4.5 billion a year, the current budget of the USF high-cost program, funded by a tax on telephone bills.

Commissioners called the vote "historic." Commissioners and U.S. lawmakers have complained for years that the USF, established in 1997, is broken, inefficient and discourages investment in new technology. The vote will bring an end to telephone subsidies from the U.S. government that began in 1934, said Commissioner Robert McDowell.

The FCC's vote is a "dramatic departure from a nearly century-old policy of opaquely subsidizing analog, circuit-switched voice communications," said McDowell, the lone Republican on the four-member panel.

Over the next six years, the new broadband fund will bring broadband service to about 7 million of the 18 million U.S. residents who don't have it, the FCC estimated. The fund will create about 500,000 new U.S. jobs over six years, as broadband providers expand service, the agency said.

"This is a once-in-a-generation overhaul of universal service," said FCC Chairman Julius Genachowski. "[The revamped program] will create jobs in the near term, and lay the foundation for enduring job creation, economic growth, and U.S. global competitiveness for years to come."

The fund will transition from voice to broadband subsidies starting in 2012, with $300 million going toward broadband deployment. A yet-to-be-determined competitive bidding process would award additional money for wired broadband deployments starting in 2013, the FCC said.

A mobility fund, targeting mobile broadband deployment, will also spend $300 million in 2012, with reverse auctions scheduled to start in the third quarter of next year. The mobility fund will have an annual budget of $500 million starting in 2013, the FCC said.

The changes will cost U.S. residents paying less than $30 a month for telephone service an additional $0.10 to $0.15 a month, but those charges will begin to decline after six years, the FCC said. The FCC's vote Thursday did not make major changes to the way USF is paid for, and McDowell called on the commission to revamp the payment structure, a tax on long-distance voice service, soon.

Several groups praised the FCC for the USF overhaul. The vote will allow millions of U.S. residents to see the economic, health and educational benefits of broadband, said Rick Boucher, a former congressman and a longtime proponent of changes to the USF. "The FCC's unprecedented efforts to reform the outdated and antiquated federal Universal Service Fund are critical to ensuring that broadband reaches underserved and rural communities across the nation," Boucher, honorary chairman of the Internet Innovation Alliance, said in a statement.

Sprint Nextel also applauded the FCC. "For more than a decade, consumers and competition have suffered as a result of a broken and antiquated regulatory regime which discourages broadband investment by subsidizing outdated services and technology," said Charles McKee, Sprint's vice president for federal and state regulatory affairs, in a statement.

But the National Cable and Telecommunications Association, a trade group, complained that the FCC gave incumbent telephone carriers the right to hang on to USF contracts in areas they cover.

"While we are disappointed in the commission's apparent decision to ignore its longstanding principle of competitive neutrality and provide incumbent telephone companies an unwarranted advantage for broadband support, we remain hopeful that the order otherwise reflects the pro-consumer principles of fiscal discipline and technological neutrality that will bring needed accountability and greater efficiency to the existing subsidy system," Michael Powell, the NCTA's president and CEO, said in a statement.

Public Knowledge, a digital rights group, is concerned that the plan will lead to higher prices for consumers "at a time when the average American is watching every penny," said Gigi Sohn, president and co-founder of the group. Public Knowledge is "deeply disappointed" that the FCC also ducked continuing questions about its authority to subsidize broadband and VoIP (voice over Internet Protocol), she said.

The FCC's vote Thursday also revamps the agency's intercarrier compensation system, the complex set of fees telecom carriers charge for carrying each other's traffic. The new intercarrier rules attempt to end the practice of traffic pumping, or access stimulation, in which small carriers artificially inflate their traffic by partnering with adult chat lines or free conferencing calling services in order to receive higher intercarrier payments.

The new intercarrier rules would require small carriers to adjust their rates if they have revenue-sharing agreements in place, if they have three times as much terminating traffic as originating traffic in a month, or if their traffic rises by more than 100 percent in a year.

Sprint's McKee called the intercarrier compensation reforms "vital to a healthy and efficient market for both voice and broadband services."

Grant Gross covers technology and telecom policy in the U.S. government for The IDG News Service. Follow Grant on Twitter at GrantGross. Grant's e-mail address is grant_gross@idg.com.

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